Coveo (TSE:CVO), a Canadian tech titan involved in AI solutions since 2005, could soon transition into profitability. Its new promising AI-based product for enterprises set for release in December makes me bullish on the stock. If you’re looking for a company with strong financials, ample cash on hand, and a chance to ride the AI wave into the future, CVO might just be the AI opportunity you were looking to ride.
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What is the Buzz About CVO’s New AI Product?
CVO will officially make its new AI product, Relevance Generative Answering (RGA), generally available for enterprise solutions on its SaaS platform in December. The company embarked on the Design Partner Program in June, and in September, it took RGA live across its customer self-serve experiences. Coveo’s solution received positive results from early enterprise-scale buyers, with early demand solidifying Coveo’s leading position.
The new AI solution for e-commerce allows companies to automate general tasks and reduce overall costs. However, one of its core functions that has gained traction is to understand and analyze individual user behavior to deliver personalized responses.
Interestingly, a recent study found that high-performing retailers use more effective personalization strategies to boost profitability during the Black Friday and Cyber Week shopping spree. This aims to increase average transaction values, rather than foot traffic, through personalized offers, a solution Coveo has built to supply that vertical.
How Do CVO’s Financials Look?
Coveo reported a loss of $6.5 million in its second-quarter Fiscal Year 2024 earnings released on November 6. However, it beat the C$9.9 million loss recorded in the same quarter of last year. Several of its financial indicators present a strong thesis for growth.
CVO’s SaaS subscription revenue grew 15% year-over-year to $29.4 million, which accounts for the period before the new AI product was launched. Its expanding customer base and revenue growth are expected to continue, driven by the company’s focus on customer retention and expansion.
The company’s gross margin of 78% is another strong indicator of potential profit margin generation. It suggests that the company has efficiently controlled its direct costs and has room to grow its profits as it scales. Although it reported a modest positive free cash flow of $0.8 million in Q2, dividends aren’t in the cards unless it turns profitable soon (more on that in the next paragraphs).
In a sign of further resilience, CVO has a large amount of cash on hand after reporting $167.8 million in cash on hand or equivalents. This leaves the company with ample reserves to keep operating. In layman’s terms, Coveo should have no immediate pressure to raise capital, forestalling the risk of potential share dilution in the near term, even if demand for its products wanes.
Coveo agrees with this assessment since it spent $26.4 million to buy back shares in the last six months as part of the C$40 million issuer bid it launched in May.
The combination of ample cash on hand and low accumulated losses underscores CVO’s ability to pay dividends in the near future without having to raise money. The company has more than doubled its revenue since 2020 without a massive breakthrough in AI, so it’s more likely to turn profitable in the near future and outperform the S&P 500’s average 10.7% per year return (since 1957).
Is CVO Stock a Buy, According to Analysts?
Consensus ratings echo the optimism I see in Coveo’s financials. The company has received seven Buy ratings in the past three months for a Strong Buy consensus rating. The average CVO stock price target of C$13.43 suggests upside potential of 23.9%.
Paul Treiber of RBC Capital and Thanos Moschopoulos of BMO Capital reiterated their Buy ratings on November 17 and 6, respectively, representing 29.2% and 24.5% upside potential. Paul has a 73% success rate in trading CVO with an average return of 24.66%, whereas Thanos’ success rate lies at 57%, with an average return of 21.36%, not far from Paul’s.
The Takeaway: CVO is a Promising AI Opportunity
Coveo has a strong financial footing, including consistent revenue growth, high gross margins, and ample cash reserves. The company’s upcoming product launch, coupled with the anticipated surge in demand during the holiday season and beyond, presents a promising AI opportunity. Positive analyst ratings also reinforce the stock’s bull case.
